SR&ED Update, Alert, and Call to Action, 2012

Over the past several weeks, we have been meeting with senior officials of Finance, Industry Canada, PCO and CRA to explain the thinking behind the key messages in CATA's 2012 Budget Commentary. This Budget Commentary reflects the consultations that CATA carried out with its members and board; and through CATA's social media networks - go to:

CATA's Budget Commentary argues that the status quo is unacceptable and calls for the federal government to:

·rationalize its programs supporting business innovation, including the SR&ED Program, under a dedicated organization accountable for the successful closure of Canada's innovation/commercialization gap;

·take the $1 billion or more in savings that should be obtainable from improving the efficacy of programs, particularly SR&ED, and redirect the monies to new indirect and direct programs focused on creating an environment that successfully commercializes Canadian innovations;

·not move to a labour based incentive as part of the SR&ED Program, as proposed by the Jenkins Expert Panel for simplifying the Program and reducing costs, unless the Government first:

·fixes the problematic nature of the SR&ED Program's management; and

·creates new tax mechanisms to support the commercialization of SR&ED innovations, i.e., incentives that pick up where the proposed labour based SR&ED tax credit stops and provides complementary support through the full commercialization of Canadian innovations; and

·create an investment environment that supports the maturing of Canadian start-ups into world class, competitive Canadian firms.

The need to obtain strong, focused leadership and accountability clearly resonated with Government officials. We were explicitly told that they understand these issues.

CATA has strongly supported the proposal of the Jenkins Panel for the creation of a council to provide a focused leadership environment for the portfolio.

However, it is clear that there is some concern with the SR&ED proposals of the Jenkins Panel, because of:

·some questions about their functionality;

·the highly skewed impacts for SMEs and some sectors that would occur if these proposals were simply implemented as outlined without a new form of tax support for commercialization; and

·the difficulty that many officials are having in understanding what has happened with SR&ED.

In respect to the conflicting strongly positive and strongly negative commentary heard about the SR&ED Program by the Jenkins Panel, we have pointed out that the methodology the Panel used to survey users of the Program was flawed. The survey had very little likelihood of picking up the impact of CRA's new and problematic review protocols and positions on what is included in SR&ED. For many claimants, CRA's regressive approaches to the Program have only become apparent in recent audits - not for the years that the survey focused on. Companies that have had good experiences with the Program for years are now finding their claims rejected.

We have also had similar discussions with senior CRA officials where we have focused on their new draft eligibility document. We have stressed that SR&ED support must go beyond support for only the initial development of new core technologies in dedicated research environments to the provision of support for:

·new uses of technologies where the significant challenge is not only if the technologies can be made to work, but also how and how well they can be made to work.

Those we speak with seem to clearly understand the importance of this point.

We have emphasized that a fully functioning and predictable SR&ED Program is an imperative for our members and we have taken Government officials through the experiences you are reporting to us, both good and bad.

Some of you are worried that the Government will simply cancel the SR&ED Program rather than fix it, particularly given CRA's recent highlighting of abuses over the last year.

Our approach to this is to highlight:

·what works and how fixes can be put in place to make the Program work much better for all parties, stressing that the status quo is what got us into this situation and that this is not the first time in the history of the program; and

·the potential savings.

CATA's suggestions have focused on:

·legislative clarity;

·the creation of policy that emphasizes facts based due diligence methodologies rather than subjective judgments of what is SR&ED and what is routine engineering; and

·the elimination of retrospective claims.

As well, we have suggested that new tax based incentives be implemented to pick up where any form of labour based SR&ED leaves off in order to assist and reward those who commercialize Canadian innovations. We have called this the "Commercialization Box", a broader concept of the "Patent Box" tax incentives being explored currently by many other countries to promote the exploitation of their IP.

We believe that the elimination of retrospective claims can free up upwards of $ 1 billion for redistribution, and greatly improve the quality of the claims.

Call for action: During the Christmas Recess when your local MPs are home, take the time to explain to them the importance of:

·creating a sustainable environment for focused leadership of the "innovation/commercialization" portfolio; and

·implementing a more effective and efficient SR&ED, i.e., getting it right.

We suggest that what "right" means is not the current status quo with its perennial problems, but rather what is needed is a new and stable management environment; and a clear, and effectively targeted legislative base for the Program.

CATA has stressed that, at a minimum, an organization other than the CRA should be responsible for the decisions on what is SR&ED. This has worked well for other incentives, why not SR&ED?